Download 4. The Euro Area Enlargement

4. The Euro Area Enlargement
The Euro Area Enlargement
The new Member States
• are large in population
• but are small in economic terms
New Member States
Population
(millions)
75
GDP
(billion euros)
413
EMU12
305 (24%)
6828 (6%)
EU15
381 (19%)
8843 (5%)
2003
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The Euro Area Enlargement
• Basic Statistics
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The Euro Area Enlargement
• EU10 Country Profiles
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The Euro Area Enlargement
• EU10 Country Profiles
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The Euro Area Enlargement
• EU10 Country Profiles
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The Euro Area Enlargement
Nominal versus real convergence
•
High divergence of real GDP per capita and of price
levels
Economic catch up leads to (Balassa – Samuelson effect)
–
–
high inflation OR
nominal appreciation of the currency
Real GDP Gap: Economic Convergence Theory by Robert
Solow
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The Euro Area Enlargement
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The Euro Area Enlargement
• Unemployment Rates
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The Euro Area Enlargement
Inflation rates: Because of catch up growth, inflation rates in EU10
countries higher than in EU15
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The Euro Area Enlargement
Inflation rates
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The Euro Area Enlargement
Long-Term Interest Rates
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The Euro Area Enlargement
Long-Term Interest Rates
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The Euro Area Enlargement
Nominal versus fiscal convergence
• Central bank independence and convergence of inflation are
prerequisites for joining EMU
• These increase the burden for government budgets.
• Budget deficits in many new Member States have increased a lot.
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The Euro Area Enlargement
Government Deficit to GDP Ratio
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The Euro Area Enlargement
Government Deficit to GDP Ratio
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The Euro Area Enlargement
Government Debt to GDP Ratio
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The Euro Area Enlargement
Government Debt to GDP Ratio
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The Euro Area Enlargement
Government Deficit and Government Debt to GDP Ratio
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The Euro Area Enlargement
Exchange Rate Stability
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The Euro Area Enlargement
Exchange Rate Stability: ERM II
Denmark: the Danish kroner joined the Exchange Rate Mechanism II (ERM II)
on 1 January 1999 and
observes a central rate of 746.038 and
narrow fluctuation margins (±2.25%) vis-à-vis the euro.
Estonia: the Estonian kroon joined the Exchange Rate Mechanism II (ERM II)
on 28 June 2004 and
observes a central rate of 15.6466 and
standard fluctuation margins (±15%) vis-à-vis the euro.
Estonia unilaterally maintains a euro-based currency board.
Cyprus: the Cyprus pound joined the Exchange Rate Mechanism II (ERM II)
on 2 May 2005 and
observes a central rate of 0.585274 and
standard fluctuation margins (±15%) vis-à-vis the euro.
Latvia: the Latvian lats joined the Exchange Rate Mechanism II (ERM II)
on 2 May 2005 and
observes a central rate of 0.702804 and
standard fluctuation margins (±15%) vis-à-vis the euro.
Latvia unilaterally maintains the exchange rate of the lats within a 1% fluctuation band
around its central rate vis-à-vis the euro.
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The Euro Area Enlargement
Exchange Rate Stability: ERM II
Lithuania: the Lithuanian litas joined the Exchange Rate Mechanism II (ERM II)
on 28 June 2004 and
observes a central rate of 3.45280 and
standard fluctuation margins (±15%) vis-à-vis the euro.
Lithuania unilaterally maintains a euro-based currency board.
Malta: the Maltese lira joined the Exchange Rate Mechanism II (ERM II)
on 2 May 2005 and
observes a central rate of 0.429300 lira and
standard fluctuation margins (±15%) vis-à-vis the euro.
Malta unilaterally maintains the exchange rate of the lira at the central rate vis-à-vis the euro.
Slovenia: the Slovenian tolar joined the Exchange Rate Mechanism II (ERM II)
on 28 June 2004 and
observes a central rate of 239.640 and
standard fluctuation margins (±15%) vis-à-vis the euro.
The tolar will leave ERM II when Slovenia adopts the euro on 1 January 2007.
Slovakia: the Slovak koruna joined the Exchange Rate Mechanism II (ERM II)
on 28 November 2005 and
observes a central rate of 38.4550 and
standard fluctuation margins (±15%) vis-à-vis the euro.
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The Euro Area Enlargement
Balassa – Samuelson Effect
Traded goods sector (manufactured goods)
• Economic catch up implies higher productivity growth in traded
goods sector
• Higher productivity leads to higher wages for worker in this sector
Non-traded goods sector (services)
• As labour is mobile between the traded and non-traded goods
sectors, wages in the services sector rise as well
• But productivity does not increase in the services sector.
Consequently, prices of services rise. Inflation is higher than in the
EU15
• Real convergence (higher productivity growth) conflicts with nominal
convergence (to a common inflation level)
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5. The EU Unemployment
• Basic Facts
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5. The EU Unemployment
• Basic Facts
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5. The EU Unemployment
• Basic Facts: Duration of Unemployment
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5. The EU Unemployment
• Basic Facts: Young Unemployment Rate
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